Iowa farmland prices ignore drought, set record high in 2012

Red-hot demand for farmland in the top U.S. corn-growing state of Iowa drove prices to record highs in 2012, buoyed by demand from cash-rich farmers and ignoring the worst U.S. drought in the last 50 years.

The average price of Iowa farmland was $8,296 an acre - an all-time high - a 23.7 percent rise from a year ago, according to the Iowa Land Value survey of 486 real-estate brokers and other market participants compiled by Iowa State University. That surpassed the previous record of $6,708 set in 2011. The gains also mark the third year in a row where values rose more than 15 percent.

Sky-rocketing land values have stirred banker fears about the possibility of a ruinous farmland bubble like the one seen in the 1980s U.S. farm crisis, when over-leveraged farmers lost their land as interest rates jumped. But farmers are carrying much less debt today, thanks to record incomes in recent years.

"Iowa land values have increased more than two and a half times since 2003," Michael Duffy, Iowa State agricultural economist and lead author of the land value survey, said in a summary of the findings. "Obviously these increases raise concerns there will be a major correction in land values."

Located in the center of the U.S. Corn Belt, the largest corn- and soybean-producing region of the world, Iowa enjoys rich soils and a normally temperate climate. Iowa leads the country in corn, soybean, ethanol and hog production and alone produces about 18 percent of the nation's corn and soybean crops. Crop yields were hurt this year as the historic drought depleted soil moisture and concerns continue about 2013. But Duffy said that farmland values strengthened after the drought-hit harvest.

"Better than expected crop yields and the level of land sales activity due to the proposed changes in land-related taxes contributed to the increasing values," Duffy said in a statement.

Iowa farmland values vs corn prices:

Farmland values in the central United States are closely tracked by government economists as a gauge of the U.S. economy and health of the banking system. In recent years both crop prices and farmland prices have set records as the burgeoning biofuels industry, record food exports, and low interest rates spurred demand for land.

"The majority of farmland sales, 78 percent, were to existing farmers. Investors represented 18 percent of the sales," according to the survey. "This level of farmer purchases is similar to what existed in the early 1990s."

Duffy said Iowa farmland purchases by nonfarm investors peaked in 2005 at 39 percent. But farmers, buoyed by record grain prices and the ethanol boom since the 2007 U.S. energy law mandated a jump in renewable fuels, have resumed their role as the driving force in the market.

"There are other causes for the increase," Duffy said. "Interest rates are at the lowest level in recent memory."

The Iowa State survey underscores the strong gains in Midwest and Plains farmland seen in recent Federal Reserve reports. The quarterly survey of Midwest bankers conducted by the Chicago Federal Reserve Bank estimated Iowa farmland values rose 18 percent in the July-September period from a year ago. Grain farmers not only benefited from a late bump in their drought-hit corn and soybean yields but also saw balance sheets enriched by crop insurance payments.

The survey said that the highest land values were reported for northwestern Iowa, where farmland values averaged $11,404 per acre while the lowest were in south central corner of the state averaging $4,308 per acre.

In October, a parcel of 80 acres of crop land in northwestern Iowa sold for a record $21,900 an acre.